How prepared are Airtel, Vodafone Idea to face the Rs 93,000 crore AGR shock?

Even as telecom companies await relief package from the government following the Supreme Court's verdict last week asking them to pay up about Rs 92,641 crore to the Department of Telecom (DoT) over the AGR (adjusted gross revenue dispute) dispute, it's time to look at their preparedness to take this shock.

As per the latest (2018/19) annual reports of both Airtel and Vodafone Idea, they are putting the disputed amount for AGR under contingent liabilities. Airtel has said that "contingent liability includes such demand and interest thereto (excluding certain contentious matters, penalty and interest thereto) for the financial year for which demands have been received by the company."

The AGR dispute dates back to 2003 when the association of telecom operators filed the first plea with the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) challenging the definition of AGR. The DoT demand, based on a special audit, from telcos over outstanding dues begins from 2006/07.

Under contingent liabilities, Airtel has provisioned about Rs 9,779.4 crore on account of DoT demands in 2018/19. But Airtel's DoT demand sub-head is not just restricted to the AGR dispute. In fact, this number has gone up 140 per cent in just one year from Rs 4,077.8 crore in 2017/18.

Also read: Infographic: Can telcos survive Rs 93,000 crore AGR blow?

Vodafone Idea too has treated the dispute as contingent liability, and has provisioned, among other things, Rs 17,123.6 crore for the licensing disputes. As per standard accounting practice, companies have to make provisioning for such claims. As per estimates, Airtel owes about Rs 21,682 crore while Vodafone Idea's payout will be much bigger at Rs 28,308 crore. Their provisioning is far short of the actual amount due to them.

Rajan S. Mathews, director general of COAI (Cellular Operators Association of India), says telcos would have provisioned just the actual amount, as there's no way to calculate the other three components: interest, penalty and interest on penalty.

The fuss over defining AGR has dragged on long enough that the actual disputed amount is just about 25 per cent of the total dues that DoT is asking for. For instance, out of the total dues of Rs 92,641 crore, Rs 23,189 crore is the disputed amount, Rs 41,650 crore is the interest component, Rs 10,923 crore is the penalty, and Rs 16,878 crore is the interest on penalty.

While the final amount due is being calculated by DoT, and will be communicated to telcos over the next few days - a reason given by Airtel to defer its second quarter results - the two incumbents (Vodafone Idea and Airtel) are supposed to pay about 54 per cent of the total due amount. But dues are pending on 16 players - a majority of which have shut shop due to acquisitions by larger players or have gone belly up. It's still unclear whether incumbents would have to pay for dues pending on telcos they have acquired. Airtel, for instance, acquired Telenor, Tata Teleservices' mobile business, Quadrant and others.

Also read: 'Airtel, Voda Idea shedding crocodile tears': Reliance Jio in letter slamming COAI

In a nearly hour-long analyst call for discussing the second quarter's operational performance on October 30, Airtel's senior management did not cover the provisioning aspect though the telco said that it has a fair amount of liquidity, and have access to bank lines and bond markets. The telco also said that its cash balance stands at over $2.3 billion to tide over the unusual event.

The SC's verdict has a far-reaching impact on the sector which is already battling with prolonged tariff wars and high debt burden. The profitability of incumbents is seriously under duress. Airtel, for instance, posted net losses of Rs 2,392.2 crore in the quarter ended June 2019. Vodafone Idea recorded net loss of Rs 4,873.9 crore in the same quarter.

The apex court has given three months to telcos to pay the due amount to DoT which won the case last week. DoT argued that a wider number of items - interest income, dividend, profits on the sale of assets, insurance claim and forex gain - should be included into the definition of AGR. The telcos didn't agree to the DoT's claims, and are now hoping for some relief package from the recently-constituted Committee of Secretaries (CoS) which will look into ways to revive the sector.

Also read: Govt forms panel to look into financial woes of telcos after SC's AGR blow

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